Tuesday, January 31, 2012

Carmakers show Indian manufacturers can compete

So far, economic development in the world's largest democracy has focused on services more than manufacturing. But India needs balance and carmakers provide an example to follow.
India's manufacturing sector makes up only 16 percent of its GDP. This needs this to increase if the country is to find jobs for its huge population. Yet on the back of strong domestic demand, global car manufacturers have flocked to India and are helping to make the sector globally competitive -- particularly in small cars. Capacity is expected to increase from 4.8 million units in 2010 to 12 million in 2018 according to Rothschild. India is set to become the third-largest auto maker in the world and could become a major exporter.
Small cars make up 70 percent of the domestic market. And although Tata and Mahindra provide strong local competition, foreigners are dominant. Foreign direct investment (FDI) into the automotive industry increased by 48 percent to $7.4 billion in 2011, according to Ernst & Young. Suzuki alone has a 45 percent share.
With no caps on FDI, new entrants are spurring competition. And in contrast to recent policies on retail, state governments have been welcoming. Clusters are being created in the south and west of India where states such as Tamil Nadu and Gujarat offer cheap land to attract investment.
But it's not just the domestic market that is fuelling growth. Exports already make up 15 percent of output, and many firms have ambitions to develop the international angles. Hyundai uses India as the global source point of all their small cars. Last year it exported 247,000 cars from India -- almost double the 2007 figure. Ford is stepping up export of Indian cars to over 50 countries. And Toyota's says it plans to export cars to South Africa in March 2012, the first time it will ship Indian-made cars overseas.
Infrastructure bottlenecks, skills shortages and slow-moving bureaucracy pose big challenges to India's manufacturing development. But as labour cost in China rise, India has an opportunity to win market share. In autos, it may have found a formula that can be replicated.
-- Overseas investment in India rose for the first time in three years in 2011, Ernst & Young reported on Jan. 29.
-- Foreign direct investment rose 13 percent to $50.81 billion in the first 11 months of 2011 from a year earlier, according to the EY report. The total number of projects rose 25 percent to 864. Automakers led the way, increasing spending by 46 percent.
-- India is set to become the third largest automotive maker in the world by 2015 according to a report by Rothschild, the investment bank, in Dec. 2011.
-- Ford plans to invest $142 million in its 200,000 vehicles-a-year plant in Chennai the company announced this month.
(Source: Reuters)

Monday, January 30, 2012

Vitrified segment turns into a big game-changer for listed tile companies

Players with strong presence in this space have outshined peers.
Recent labour troubles dogging Regency Ceramics have brought to light the divergence in performance between listed tile companies. Kajaria Ceramics, with a 58 per cent gain in its stock price in one year, is among the top performing stocks in the listed space. But Regency Ceramics has lost 37 per cent to languish at Rs 4.2. Why the difference?
Their underlying financials provide some explanation. Kajaria Ceramics has delivered a 34 per cent increase in its net profits in the nine months ended December 2011, while recording an operating profit margin of 15.4 per cent, on sales that were up 40 per cent. Regency Ceramics continued making net losses in the first six months of this fiscal, with operating profit margins at 2.5 per cent.
So, what has contributed to the big difference in fortunes for tile makers?

Ceramic vs vitrified

A primary factor has been the player's sales mix — whether it consists of ceramic or vitrified tiles. While growth in ceramic tiles has been lacklustre, vitrified tiles have recorded a strong growth in demand as well as realisations.
Of the major categories in flooring options for buildings — vitrified, ceramic and marble — vitrified tiles is the category that witnessed the highest demand growth in the last five years. Demand here has grown at a compound rate of 16 per cent annually. Higher durability and easier maintenance compared to both cheaper options such as ceramic tiles and dearer ones such as marble have helped this category cash in on the steady demand for construction material. The cheaper ceramic tiles have seen demand grow at only 8 per cent annually in the last five years.

Better demand, price

Players who entered vitrified tile manufacturing or expanded their presence in this space through expansions or acquisitions over the last three years have benefitted the most from this trend. Kajaria Ceramics (10 million square metre since 2010), Asian Granito (addition of 5.11 million square metre since 2007) and Somany Ceramics (2.45 million square metre in 2010-11) are the instances. These players have grown their sales at 20-30 per cent annually in the period, much higher than the industry average. Smaller manufacturers such as Bell Ceramics and Regency Ceramics who grappled with capacity constraints and were unable to add vitrified tile capacity, lost out on growth opportunities.
Presence in the vitrified tiles segment supported sales growth through increased realisations too. Nitco Tiles, a key player in the vitrified tiles market, has seen its realisation in this segment jump by 28 per cent in 2010-11. In ceramic tiles, the realisation increase was only 2 per cent; while marble tiles saw a realisation drop of 14 per cent.

Trading trims margins

A second big differentiator which decided profit margins of players was the proportion of own manufacture to trading.
Of the number of players who sell vitrified tiles in the Indian market, only a few own manufacturing facilities; others import products from China and simply market them. Apart from the import price, traders cough up customs duty at 10 per cent and anti-dumping duty at Rs 137/square metre. A weak rupee obviously adds to costs.
Sample this: Both Nitco Tiles and Kajaria Ceramics sell vitrified tiles. However, while Nitco relies, to a significant extent, on imports from China, Kajaria Ceramics manufactures a significant portion in-house. The operating level profit margin of Nitco Tiles is 8 per cent while that of Kajaria Ceramics' is 13 per cent.
Operating profit margins vary between 4 per cent and 18 per cent between players in the industry. While proportion of trading income in sales is a key determinant of profit margins, other inputs used in manufacture — domestic or imported and the fuel used (propane or natural gas) — alters margins. Kajaria Ceramics replaced high-cost fuel propane with natural gas at its Galipur unit in Rajasthan in May 2010 and has since seen a jump in profitability.
Regency Ceramics, on the other hand, has been facing cost pressures on two counts — the higher cost of imported vitrified tiles and the increasing cost of fuel in its manufacturing operations.
(Source: Business Line)

Why private equity loves the Shriram Group

A founder who drives a Santro to the cross-selling of products to a huge customer base are just some of the reasons why PE investors and other firms love investing in this company
Shriram Capital is the undisputed destination of choice for private equity (PE) players in India. As of today, 23 PE investors have invested over $750 million in Chennai-based Shriram Group since 2005 according to Venture Intelligence, a research firm that tracks PE investments in India.
So, why is the Shriram Group the darling of PE outfits?
R Thyagarajan, founder of the Group, has a simple answer, “We treat all investors including minority investors as partners. We believe that all of them should benefit as much as we shareholders benefit. There is, therefore, a unique convergence of objectives leading to a win-win situation all the time. ”
GS Sundararajan, managing director, Shriram Capital Ltd (SCL)—which is the holding company of all the financial services business in the Group—gets a little more specific. According to Sundararajan, the Group operates in a market which is under served. “Competitors could not understand the business, which helped us to enjoy a near monopoly in the areas where we operate and the returns to the investors, in some case exceeded six times of the investment made,” he says.
In general, industry insiders say that the Group functions in a niche area which gives them good volumes, higher and superior yield and minimal credit loss of two per cent. It’s been able to get into areas which banks and other financial institutions have been wary of, such as financing for small truck owners.
Shriram Group’s numbers aren’t too shabby either. In the last 7 to 8 years, the Group’s financial businesses grew almost 50 times in market capitalisation—which is sweet music for any PE player. Plus, earnings per share (EPS) for an investor in Shriram Transport Finance Corporation (STFC) (which gives Shriram Capital up to 70 per cent of its profits) was Rs 11.01 in 2006-07, soaring to Rs 54.49 in 2010-11, an increase of almost 395 per cent.
Shriram’s goldmine
In order to further understand the Shriram Group’s allure, it is worth reviewing its sprawl of businesses. The major parts of PE investments are in the Group’s finance businesses—of which Shriram Capital is the holding company—and include STFC, Shriram City Union Finance Ltd (SCUF) and Shriram Retail.
Major investments made in Shriram Group since 2004
CompanyCompany TypeInvestorsAmount ($M)Date
Shriram Retail HoldingsUnlistedTPG Capital1208-Sep
Shriram Transport FinanceListedTPG Newbridge1005-Sep
Shriram City Union FinanceListedChrysCapital, ICICI Venture, Bessemer, Asiabridge658-Apr
Shriram City Union FinanceListedChrysCapital, CPIM Funds, Merrill Lynch Real Estate436-Nov
Shriram City Union FinanceListedNorwest259-Jul
Shriram Transport FinanceListedChrysCapital135-Feb
Shriram City Union FinanceListedNorwest39-Aug
Shriram Transport FinanceListedReliance Capital14-Jun
Shriram Transport FinanceListedFMO14-Oct
Source: Venture Intelligence
STFC lends money to truck owners while SCUF is a retail finance company which has also made forays into housing financing, by floating a new subsidiary. (The two month-old company caters to small loans that range from Rs 10-15 lakh.) The Group also has two insurance companies, Shriram Life Insurance Company Ltd and Shriram General Insurance Ltd, as well as Shriram Fortune Solutions, Shriram Insight Share Brokers and Shriram Wealth Advisors. Other properties include a non-finance business, Shriram EPC, run by Thyagarajan’s elder son T Shivaraman which provides end-to-end solutions to engineering, construction and project management services (and recently scarfed up $290 million from Bessemer Venture Partners) and a renewable energy company called Orient Green Power, also run by Shivaraman which has attracted $55 million from an investor Group led by Olympus Capital Holdings Asia. Shriram Properties, established in 1995, attracted investors like TPG, Waltonst, Starwood, SunApollo and ICICI AMC.
The real secret behind the Group’s success are its customers. Their current consumer base stands at 3.5 million and over the last 30 years, the Group has catered to around seven million of them. Shriram Chits alone has disbursed over Rs 50,000 crore to chit subscribers and SMEs. These Chit fund customers, according to Sundararajan, are the base for the Group, and represent the company’s goldmine. “Today 70 per cent of the general insurance company’s products is sold to existing customers, mainly truck owners. Similarly, 50 per cent of life insurance products and one third of retail products of SCUF are sold to the existing Chit customers,” adds Sundararajan.
Overall, 16 to 18 per cent of revenues of Shriram Capital comes from the same customer base, compared to the industry average of around five per cent. “This brings down the cost of acquiring new customers in a big way,” said Sundararajan. The company says that on average an agent makes at least 10 calls to convert a query or a potential buyer to a customer. Whereas in Shriram, it takes only about three calls, since the agent already knows the customer. Another inherent advantage: the strong network of collection agents of Shriram Chits.
While South African insurer, Sanlam Group, isn’t a PE investor it has earmarked ZAR 2 billion (around Rs 1,270 crore) to buy 26 per cent in Shriram Capital Ltd. Its CEO, Johan van Zyl, recently echoed the advantages that Shriram is able to leverage in an online blog. “We’ve been working with the Group for about five years and we like what we see. There are a lot of synergies between the businesses we are invested in, so instead of just holding 26 per cent at the subsidiary level, we have now rolled up our interest up to the top level,” said Zyl.
All about people
Sometimes, the type of people employed by the company—and how many years they’ve logged there—can often be a good indicator of the kind of company it is. Today, all the seven CEOs of the financial businesses of the Group have been with it for over 25 years. K Ramakrishnan, executive director & Head— Investment Banking, Spark Capital, who has tracked the company for 16 years says that “It has grown with home-grown leaders, and has generally stayed away from high-profile recruitments.” In fact, some of the branch managers joined as clerks in the company. “We are cost-conscious and have a fugal management policy. We do what the customer wants. This low- cost approach has helped sustain us,” said Sundararajan.
For starters, Thyagarajan himself does not have a cell phone and drives a Hyundai Santro. In November 2006, Thyagarajan decided to share his wealth with his management team, who were driving the Group. He floated two Trusts—Shriram Ownership Trust and Shriram Enterprise Trust. Through these trusts, 75 per cent of the promoter’s holding is transferred to those in management team upon their retirement, thereby making them owners of the Group. “We aren’t focusing all the time on what our share (of the equity) should be. That’s because there isn’t a promoter family or anything like that behind the Group,” said Thyagarajan in an interview. The overarching philosophy seems to have worked. Attrition rate in the financial service businesses of the Group is around 12 to 15 per cent, versus the industry average of 40 per cent.
Fat returns
Ultimately, all of Shriram’s unusual traits have manifested themselves into handsome money for its investors. In 2005, ChrysCapital invested Rs 100-120 crore in STFC and exited in 2009 for a cool Rs 1400 crore, 11 to 12 times what they put in. The Texas Pacific Group, which invested around Rs 550-600 crore in two tranches and is currently planning an exit in the next few months, is estimated to make 5 to 6 times its original investment. Citi Financial which slapped down Rs 11 crore exited with Rs 200 crore.
Apparently, the Group is now suffering from too much interest in it, and is having to pick and chose investors, such as Japan-based Orix Corporation which wants to fill in the gap left by TPG’s exit.
PE firms such as LeapFrog, which placed Rs 67 crore into Shriram CCL, a financial services distribution company in September 2011, are fans for a few different reasons. Jim Roth, co-Founder of LeapFrog said that his firm’s investment is important because it “will have enormous impact, by financing and improving cover for lakhs of financially-excluded clients and their families. It also gives good returns.”
Now, if only all promoters drove small cars.
(Source: Business Standard)

States' bailout in the offing

Bailout packages for fiscally stressed states are in the works, as the government seeks to garner political backing for the key policy reforms it plans to fast-track after the five state elections. A senior finance ministry official involved in the process told Business Standard a high-level committee under expenditure secretary Sumit Bose had held consultations to identify measures to help West Bengal, Punjab and Kerala.
West Bengal Chief Minister Mamata Banerjee has been demanding a bailout package from the Centre to improve the fiscal situation of the severely debt-ridden state. The Trinamool Congress leader’s blocking of foreign direct investment in multi-brand retail and other policy measures of UPA-II is being seen, among other things, as a reaction to the delay in a bailout package for West Bengal.

The state government is scheduled to present its first Budget immediately after the Union Budget. The official said since it would be difficult for the Centre to help just one state, a comprehensive package for other states in trouble was being worked out. It would be developed keeping in mind the tight fiscal space available with the Central government, he said.
The official said the panel was slated to resume work to concretise the states’ bailout package after the Assembly polls would end in the second week of March.
But he hinted its contours could be outlined in the Budget by Finance Minister Pranab Mukherjee.
That, he said, would likely help West Bengal Finance Minister Amit Mitra formulate Budget initiatives for the state and also lessen opposition by the Trinamool Congress to Central policy initiatives.
West Bengal is reeling under Rs 15,093 crore of interest payments and Rs 6,900 crore of prepayments for 2011-12. State finance ministry officials say the situation can’t be tackled by raising tax revenues. “The bigger picture is not manageable easily, with the state’s total debt at Rs 2 lakh crore — that can’t go away easily,” said an official.
“This unmanageable financial scenario inherited by my government can only be corrected by a large infusion of liquidity, particularly for non-Plan expenditure, in the form of a grant-based financial package,” Banerjee had said at a National Development Council meeting on October 22, 2011.
The fiscal situations of Punjab and Kerala also indicate the two states have financially deteriorated considerably (see chart). In the case of West Bengal, the government was likely to allow additional borrowing, proportionate to the borrowing the previous state government had done, and set a liberal fiscal deficit target, said the official associated with the process.
“Aid for Naxal-affected areas on the lines of the backward region grant fund for infrastructure development can also be part of the package,” he said. The centre is also considering writing off a part of high-cost borrowings from the National Small Savings Fund.
(Source: Business Standard)

Cinema advertising: Rising from the ashes

Why are advertisers flocking back to cinema theatres?
Over the past three years, ad revenues have doubled for almost every major theatre chain in India, hitting a total of roughly Rs 250 crore in 2010-11. This is over a fifth of what advertisers spent on radio and a third of their online ad spends in the same period. At a 35-40 per cent rise year-on-year, cinema advertising is growing faster than online, radio or overall advertising growth, where the annual growth is about 11 per cent.
This growth is funded not by the local saree shop or restaurant coming for a day but by large national advertisers such as L’Oreal, Maruti, Tata DoCoMo and Samsung, coming in for months at a time. These kind of sustained cinema campaigns were unheard of even three years before.
From almost nothing, national brands are now spending up to one per cent of their advertising budgets on multiplexes and single-screen digital theatres. A little more than 80 per cent of the Rs 50-odd crore that PVR made in ad revenue in March 2011 came from national advertisers. This is true for most chains. “More than 45 per cent of our business (now) is long-term. These are campaigns that last for six months and more,” says Gautam Dutta, chief operating officer, PVR.
While TV and print have well-defined norms and metrics, cinema is as yet a hazy area for advertisers and media people. Some of the basics of advertising in cinema halls:
* Typically, there is 15 minutes of ad inventory. Most theatres play seven minutes before the film and seven during the interval
* If the chain is digital inventory could be sold in any unit a 10, 30, 60 seconds and so on
* If the chain or screen is analog, inventory is usually sold in 60 second units. Since TV ads are 30 seconders and most brands do not shoot special ads for cinema, it explains why you see the same ad twice sometimes
* It could cost anywhere from Rs 2,000-20,000 per 30 second, per screen, per theatre, per week, to advertise with a chain
One such long-term advertiser is Lufthansa. It now spends 10 times the money it did on cinema four years earlier. “Cinema came as a complete surprise to us,” says Sangeeta Sharma, manager, marketing communications, South Asia, Lufthansa. About six years before, the airline, focused on the business traveller, decided to enter the leisure segment. This pushed it to experiment with several things — coffee table books and cinema chains included. Soon, it was doing on-screen commercials, ticket jackets, on-site ads and online ones with PVR across India. The results were good. According to a brand track Lufthansa does, brand recall is up 17-100 per cent.
What’s the scene?
Alok Tandon, CEO, Inox Leisure, emphasises: “About 3.5-4 billion movie tickets are sold in India every year. That means every Indian goes to a theatre 3.5 times year. Movie theatre ads have reach.” They always had. However, three things conspired to make cinema more appealing to advertisers.
The first, says Arun Tyagi, business head, Big Cinemas, was a structural shift in the way theatre advertising is sold. Till five years before, advertisers had to use a handful of agencies such as Dimples or Salvos. These navigated a fragmented market, with 12,000 individual screen owners. As PVR, Inox, etc, got bigger, they started appointing their own sales teams. These have done a better job of selling the medium to advertisers.
Second, the growth of multiplexes unleashed a creativity that the Rs 14,000-crore Indian film industry hasn’t seen since the ‘70s. As audiences started returning to the theatres, cinema came on to the media planner’s radar.
Anita Nayyar, CEO, India and South Asia, Havas Media, reckons, “It is a great medium if you want the undivided attention of the audience.”
That is the third, arguably biggest, reason. Most consumers in over-served media markets like Mumbai, Delhi, Chennai, etc, get hit with huge amounts of advertising on TV, print and other media. If you live in any of the top 10-12 cities, you probably screen out ads automatically. In a dark theatre, however, you are easy prey. You have to switch off your mobile. There are no doorbells, colleagues, other media, nothing to take your attention away from the screen. You have probably paid Rs 100-400 to watch a film. All this makes you a coveted target.
This is borne out by the numbers. Dutta says roughly 80 per cent of the ad spends on PVR are targeted at screens located in Mumbai, Delhi and Chennai. Brands wanting to reach out to consumers in these cities usually spend more. Loop Mobile, which operates only in Mumbai, spends five to 10 per cent of its budget on cinema.
Arif Ali, vice-president and head, brand communications, Loop Mobile, says cinema supplements the TV effort. The digital chains agree. “Cinema is adding to your reach,” says Arvind Ranganathan, CEO, Real Image.
Cinema versus TV
However, unlike rating points in television, there are no metrics in cinema. There are some efforts to tackle that. According to a study done by Nielsen, Real Image’s network of 475 screens in Tamil Nadu was the second-most effective after Sun TV. Both the digital chains, UFO and Real Image, use TV as a benchmark for pitching and pricing.
Not all multiplexes are comfortable with that. “TV can’t be a benchmark because we can’t give the same reach,” argues Sunil Punjabi, CEO, Cinemax India. What establishes reach for cinema is the audience numbers, he thinks. For instance, Cinemax had 17 million footfalls last year and PVR had 26 million.
For now, that seems enough to keep the advertisers coming.
(Source: Business Standard)

Telecom: Value-added services hold the key as user additions fall

The Indian wireless communications market is fast reaching a saturation point with a sharp deceleration in the monthly net subscriber additions.

Barring a few operators including Idea Cellular and Sistema Shyam Teleservices, operators have been reporting tapering net additions every month. In such a scenario, Bharti Airtel's strategy to expand into other geographies and Idea Cellular's ability to maintain a high ratio of active mobile accounts will come in handy for these players in retaining revenue growth and profitability in the future.

In addition, the slowing rate of new user addition will compel operators to focus more on value-added services to generate incremental revenue.

The data from Telecom Regulatory Authority of India ( TRAI) on monthly subscriber additions shows that net subscriber addition has fallen gradually in the last year across all metro cities and telecom circles. Metro regions including Chennai, Delhi, Kolkata, and Mumbai have started showing signs of fatigue in subscriber growth. In November, metros reported a drop of 8.7 lakh subscribers after reporting a subdued single digit increase in the previous three months.

In the B circle which includes Haryana, Kerala, Madhya Pradesh, Punjab, Rajashtan, Uttar Pradesh (East and West), and West Bengal, net subscriber addition has been in double digits, but the extent has reduced substantially. The circle reported 23.1 lakh new users in November, much lesser than 96 lakh a year ago.

The impact of lower additions is visible on the user base of individual operators. In addition, the facility of changing operators while retaining mobile numbers, known as mobile number portability, has resulted in subscriber churn for some players.

Tata Group, for instance, seems to be the biggest loser among operators. It reported a drop of 44.5 lakh users in November, its second consecutive month of user truncation. Idea and Sistema Shyam are the only two players who have been able to add subscribers at a faster clip for the last few months.

Mobile operators have long been relying on faster growth of subscriber base to retain revenue growth. For instance, Bharti's domestic revenue increased by 34% in the two years ended September 2011 despite a steep 45% fall in the average revenue per user (ARPU). The top line growth was largely supported by a two-fold jump in its mobile user base during the period.

The current tapering trend in new additions means operators can no longer rely solely on customer additions to sustain revenue growth. This necessitates a greater focus on improving ARPU. The launch of 3G-related services and proliferating software applications for the smartphone users will be major growth drivers that can boost the share of valueadded services (VAS) in revenue.

Given their higher margins, VAS sales will help to offset the impact of falling net subscriber additions.
(Source: Economic Times)

Look at Britain to see the tragic effects of a very bad idea: Paul Krugman

Last week the National Institute of Economic and Social Research, a British think tank, released a startling chart comparing the current slump with past recessions and recoveries. It turns out that by one important measure - changes in real GDP since the recession began - Britain is doing worse this time than it did during the Great Depression. Four years into the Depression, British GDP had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.

Nor is Britain unique. Italy is also doing worse than it did in the 1930s - and with Spain clearly headed for a double-dip recession, that makes three of Europe's big five economies members of the worse-than club. Yes, there are some caveats and complications. But this nonetheless represents a stunning failure of policy.

And it's a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years.

OK, about those caveats: On one side, British unemployment was much higher in the 1930s than it is now, because the British economy was depressed - mainly thanks to an ill-advised return to the gold standard - even before the Depression struck. On the other side, Britain had a notably mild Depression compared with the United States.

Even so, surpassing the track record of the 1930s shouldn't be a tough challenge. Haven't we learned a lot about economic management over the last 80 years? Yes, we have - but in Britain and elsewhere, the policy elite decided to throw that hard-won knowledge out the window, and rely on ideologically convenient wishful thinking instead.

Britain, in particular, was supposed to be a showcase for "expansionary austerity," the notion that instead of increasing government spending to fight recessions, you should slash spending instead - and that this would lead to faster economic growth. "Those who argue that dealing with our deficit and promoting growth are somehow alternatives are wrong," declared David Cameron, Britain's prime minister. "You cannot put off the first in order to promote the second."

How could the economy thrive when unemployment was already high, and government policies were directly reducing employment even further? Confidence! "I firmly believe," declared Jean-Claude Trichet - at the

time the president of the European Central Bank, and a strong advocate of the doctrine of expansionary austerity - "that in the current circumstances confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today."

Such invocations of the confidence fairy were never plausible; researchers at the International Monetary Fund and elsewhere quickly debunked the supposed evidence that spending cuts create jobs. Yet influential people on both sides of the Atlantic heaped praise on the prophets of austerity, Cameron in particular, because the doctrine of expansionary austerity dovetailed with their ideological agendas.
Thus in October 2010 David Broder, who virtually embodied conventional wisdom, praised Cameron for his boldness, and in particular for "brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain's economic recovery and throw the nation back into recession." He then called on President Barack Obama to "do a Cameron" and pursue "a radical rollback of the welfare state now."

Strange to say, however, those warnings from economists proved all too accurate. And we're quite fortunate that Obama did not, in fact, do a Cameron.

Which is not to say that all is well with U.S. policy. True, the federal government has avoided all-out austerity. But state and local governments, which must run more or less balanced budgets, have slashed spending and employment as federal aid runs out - and this has been a major drag on the overall economy. Without those spending cuts, we might already have been on the road to self-sustaining growth; as it is, recovery still hangs in the balance.

And we may get tipped in the wrong direction by Continental Europe, where austerity policies are having the same effect as in Britain, with many signs pointing to recession this year.

The infuriating thing about this tragedy is that it was completely unnecessary. Half a century ago, any economist - or for that matter any undergraduate who had read Paul Samuelson's textbook "Economics" - could have told you that austerity in the face of depression was a very bad idea. But policymakers, pundits and, I'm sorry to say, many economists decided, largely for political reasons, to forget what they used to know. And millions of workers are paying the price for their willful amnesia.
(Source: Economic Times)

Domestic dairy sector well on path to become global

 Bhagyalaxmi Dairy Farm lies tucked away up a rutted country track, among the patchwork of dusty brown scrub and lush green parcels of farmland to the northeast of the Indian city of Pune.

With a herd of more than 3,000 cows, a state-of-the-art milking parlour and on-site bottling plant using French technology, it's a world away from traditional Indian village farming.

The 10.5-hectare (26-acre) farm, owned by Parag Milk Foods Ltd, provides milk for its Pride of Cows brand, which at 75 rupees ($1.4) a litre is about three times more expensive than other milk on the market.

The product is currently sold directly to just 1,500 well-heeled people in south Mumbai, effectively making a staple commodity a luxury that most Indians cannot afford.

But the company sees it differently, hoping the six-month-old venture will drive up standards across India's dairy sector, where milk quality is a problem.

India has the world's largest dairy herd and is also the biggest milk producer. The National Dairy Development Board estimates that 121 million tonnes of milk were produced in 2010-11 -- about 17 percent of the global total.

But earlier this month, India's Food Safety and Standards Authority said that more than two-thirds of the milk it tested in 33 states was contaminated with substances including salt and detergent.

Skimmed milk powder, fat, glucose and added water were also found, not only reducing its nutritional value but also posing risks to human health.

Edmund Vincent-Piper says it doesn't have to be this way. As manager at Bhagyalaxmi, he's in charge of overseeing the feeding and care of the farm's thoroughbred Holstein-Friesian cattle.

Outside vehicles are disinfected at the gate and protective clothing is compulsory for workers to ensure the potential for contamination is kept to a minimum.

"This is probably India's best and cleanest dairy farm," said the 52-year-old Englishman, who is known as "Piper" to his employees and bosses.

"The potential (for dairy farming) in India is exponential when you look at the number of cows -- 120 million, the largest single population in the world -- but the downside is the output. Improvements can be made," he said.

"I'm here to show India that the technology is out there. If you feed cows properly and use proper husbandry techniques, cows will perform."

As Indian diets change due to economic growth, the government has drawn up a plan to help meet growing demand, recognising the need for science to help boost production and improve standards.

What's required, said Vincent-Piper, who has worked as a dairyman in Britain, the Gulf and Middle East, is for a change in attitudes towards dairy farming, as well as greater investment.

"The animals come first," he said, as 50 heifers at a time trooped on to a rotating platform in the milking parlour and had their heavy udders hooked up to computer-operated machines.

The job hasn't been easy, he admitted, with a lack of practical experience among Indian farm workers one of the main problems.

Employees have needed training to help "read" cows for signs of illness or distress that can affect milk supply while vets have taken persuading to give routine vaccinations to animals that are considered sacred to many Hindus.

Convincing local farmers to prioritise proper feeding of cattle to maximise milk quantity and quality, rather than giving them what's left over from crops grown for human consumption, is also a challenge.

Reducing stress levels is seen as key: Bhagyalaxmi cows are untethered and have individual pens with rubber mats instead of straw or hard brick floors. Music plays in the milking parlour.

Another part of the programme is improving indigenous stock: already male calves from Bhagyalaxmi, born through artificial insemination from pedigree bulls in north America, are being given to local farmers.

Vincent-Piper cites the Pune-based poultry giant Venky's as an example of how private enterprise can transform an agricultural sector in India into big business.

He believes that private companies like Parag, which sells dairy products from milk to mozzarella under the Go and Gowardhan brands, will help lead the way in modernising the sector.

Bit by bit, experience and knowledge is increasing, he added, predicting that similar-sized high-tech farms will come up in the next decade.

"You can do it by taking small steps. You can make a big difference," he said.
(Source: Economic Times)

India to Recapitalize State Bank With $1.6B

State Bank of India, the nation’s largest lender, will receive a 79 billion rupee ($1.6 billion) capital infusion from the government, ending a two-year wait for funds as slowing economic growth leads to a rise in bad loans.
The state-owned lender approved selling stock to the government on a preferential basis, according to a filing yesterday to the stock exchange in Mumbai. The lender has been seeking to replenish its base for about two years after increased provisions for defaults and expansion in credit depleted capital.
Shares of State Bank have rallied 27 percent this month on speculation that the funds would be injected in the first quarter. The stock slumped 42 percent last year, and Moody’s Investors Service in October downgraded the Mumbai-based lender’s financial strength rating, citing the capital shortage and its deteriorating asset quality.
“Investors had already factored in the government’s investment into State Bank, leading to the smart bounce back in the share prices in recent weeks,” said Alex Mathews, head of research at Geojit BNP Paribas Financial Services Ltd. “The key question now is, how the lender will use this capital to boost its lending book in the coming quarters.”
The lender climbed 3.1 percent to 2,047.5 rupees as of 9:48 a.m. in Mumbai. That compared with a 1.1 percent increase in the benchmark Sensitive Index. (SENSEX)
The bank’s bad-loan ratio widened to 4.19 percent of total advances as of Sept. 30, from 3.35 percent a year earlier. Its Tier 1 capital ratio, which was below the government’s 8 percent target for state-run lenders, “provides an insufficient cushion” to support growth and to absorb higher credit costs as defaults climb, Moody’s had said in the statement on Oct. 4.

‘More comfortable’

The bank’s Tier I capital will be above 8 percent by March 31, Chief Financial Officer Diwakar Gupta said in a telephone interview today.
“Going ahead, we will be more comfortable with growth as the capital moves up higher than the regulatory requirements,” Gupta said.
India’s government, which owns 59.4 percent of the bank, will inject capital into state-run lenders to ensure they have an 8 percent Tier 1 ratio by March, banking secretary D.K. Mittal said on Oct. 27. The government’s stake in State Bank may increase by 225 basis points after the investment, Gupta said. A basis point is 0.01 percentage point.
The bank planned to cancel untapped credit lines, change how some loans are classified and set up a “capital hunt” panel to review ways to conserve money, Chairman Pratip Chaudhuri said in an interview on Dec. 12.
The Reserve Bank of India’s 13 interest-rate increases since March 2010 caused economic growth in the quarter ended Sept. 30 to slow to the least in more than two years, eroding State Bank’s asset quality.
The central bank also cut the nation’s growth forecast on Jan. 24 to 7 percent for the year through March from the 7.6 percent predicted in October.
(Source: Bloomberg)

First Starbucks Store to Open in India by August

Starbucks Corp. (SBUX) and venture partner Tata Global Beverages Ltd. (TGBL) will open their first store in India by August to tap rising coffee consumption in the world’s fastest growing major economy after China.
The equal venture will open outlets in Mumbai and New Delhi this year and have 50 locations within the first 12 months, Tata Global Vice Chairman R.K. Krishna Kumar said at a press conference in Mumbai yesterday.
The Indian stores will build on the world’s largest coffee- shop chain’s expansion outside the U.S., where stores are less profitable than those in the Asia-Pacific region. Starbucks will compete with Barista Coffee Co., a unit of Italy’s Lavazza SpA (LAVA), and Cafe Coffee Day, run by Amalgamated Bean Coffee Trading Co. in India, where consumption of the drink almost doubled in the decade through 2010 to 108,000 metric tons.
“We are going to bring the Starbucks experience that is known around the world to India,” John Culver, Starbucks president for China and Asia Pacific, said in an interview. “All the coffee we serve here will be locally sourced.”
The Seattle-based restaurant operator has an agreement to source beans from Bangalore-based Tata Coffee Ltd. (TCO), a unit of Tata Global.

Asia Operating Margin

Starbucks plans to accelerate growth in the Asia-Pacific region, where revenue rose 38 percent in the quarter ended Jan. 1, Chief Financial Officer Troy Alstead said on a Jan. 26 conference call.
The company predicts an operating margin of almost 30 percent for the Asia-Pacific region this fiscal year, according to the call transcript. That compares with the Americas which is expected to rise to “slightly” more than 20 percent. The U.S. had an operating margin of 19 percent last fiscal year, according to data compiled by Bloomberg.
Starbucks rose 1.3 percent to $48.48 yesterday, boosting its gain so far this month to 5.4 percent. The stock climbed 43 percent in 2011, the third straight year of gains.
Tata Global gained as much as 6.2 percent to 104 rupees in India trading today and Tata Coffee rose as much as 1.5 percent to 878.70 rupees.

India Retail Rules

India’s government on Jan. 10 raised the ownership limit to 100 percent for foreign retailers selling a single brand, a decision benefiting companies including Starbucks. The new rules require the overseas companies to procure at least 30 percent of their products or inputs from small Indian companies if they own more than 51 percent in the venture.
The Indian economy will expand an estimated 6.5 percent this year, the fastest pace among developing Asian economies excluding China, according to January estimates from the World Bank. The Reserve Bank of India projects 7 percent growth for the 12 months ending March.
Starbucks is expanding in markets outside the U.S., whose sales contribution has fallen in the past decade to less than 70 percent in the last fiscal year, according to data compiled by Bloomberg.
The company plans to open its first store in Costa Rica in May, adding to locations in Central America including El Salvador and Guatemala.
(Source: Bloomberg)

Putin stands by state capitalism

Vladimir Putin has set out an economic vision for Russia based on state capitalism and strong, paternalistic government as he seeks to return to the presidency in the face of unprecedented protests against his rule.
In a long article in Vedomosti, the Financial Times’ sister paper, the Russian prime minister gave little sign he intended to implement measures to boost economic competition demanded by his country’s increasingly vocal entrepreneurial class
Instead, he said state conglomerates had to be the drivers of a transition to a high-tech economy that Russia must make to survive a time of “fundamental change” in the global economy.
Citing China and South Korea as successful examples, Mr Putin defended the state corporations created under his rule and said only the state was in a position to ensure financing for the high-risk innovation needed to reduce Russia’s dependence on commodity prices.
“For Russia, it would be inadmissible to not have an economy that can guarantee stability, sovereignty and a decent standard of living,” he wrote. “We need a new economy with competitive industries and infrastructure, with a developed service sector; in short, an economy that harnesses modern technology.”
Dismissing frequent criticism that the state is inefficient in fostering innovation, Mr Putin said private companies had proved unwilling to take on the risks. Although he admitted that most state-run corporations had not proved competitive so far, “we don’t intend to drop what we began halfway”, he said.
Analysts and critics said Mr Putin’s article did little to address hopes that he could adopt a more liberal agenda to accommodate an emboldened middle class protesting against the cronyism that state capitalism has fostered so far.
“This isn’t Putin 2.0. it isn’t even Putin 1.0 – it’s Putin 0.1,” said Sergey Aleksashenko, a former deputy central banker who is now head of macroeconomic research at the Higher School of Economics in Moscow. “I can understand that in some countries innovation can be driven by state corporations, but not in Russia when the government is corrupt and state corporations are filled with the friends and relatives of officials.”
“This is a step back, this is a return to the chaebols of South Korea,” said Igor Yurgens, the head of a liberal think-tank that has sought to guide the more liberal policies of Dmitry Medvedev’s presidency. “The main idea is to freeze the status quo.”
Mr Putin admitted “systemic corruption” was hindering private business, saying the entire court and law enforcement system had to be changed while all commercial disputes had to be transferred from criminal to commercial courts to break collusion between prosecutors and judges.
And although he called for a reduction of the role of the state in the economy, repeating pledges that stakes in some state-run corporations would be sold by 2016, it was not clear whether these would be controlling stakes. He was short on any specific reforms beyond this vague pledge and a call to tinker with the tax system by enforcing a tax on luxury goods.
Putin “identified all the problems correctly. But there was contradiction,” said Roland Nash, chief strategist at Verno Capital, a Moscow hedge fund. “On the one hand he said the government should get smaller, but on the other hand he is calling for it to solve a lot of problems.
“The problem is this government hasn’t delivered. It has a poor track record. All the successes in Russia have been in the private sector.”

FMCG cos bank on re-launches to retain brand sizzle

A slowing economy and surging inflation are not the best conditions for launching new products – especially in the fast moving consumer goods (FMCG) sector, where consumer favour can disappear faster than the froth whipped up by the soap or toothpaste in question.
But caught between twin pincers of slowing topline growth and shrinking profits, FMCG manufacturers are running out of options. With big-budget new launches few and far between in these tight times, they are resorting to the second-best option – re-launching their existing brands.

A spell of re-launches

The past two months alone have seen a flurry of re-launches and brand extensions in the FMCG sector. Procter & Gamble re-launched its Oral B toothbrushes, Emami ran a new campaign for Malai Kesar cold cream, Wipro repositioned Sanjeevani honey as Glucovita honey and Nestle too rebranded its milk and yogurt as Nestle A+.
Besides, existing brands already carry a huge burden of investment. Dumping a brand before it has paid for its investment is tough for an FMCG company. “So if the company feels minor tweaking will improve the product performance, or more aggression is needed on the marketing side, they re-launch,” says Mr Gaurav Gupta, Director, Deloitte.
Re-launches or brand extensions become even more attractive when sales volumes are slowing and margins getting squeezed. The data on the FMCG sector actually shows better profit growth this year than last year, but sales growth has been slower.
Most companies have managed bottomlines by resorting to direct price hikes, or indirect increases by tweaking pack size. Production efficiencies have also been stepped up to combat input cost inflation. But if the volumes fail to keep pace, then the high profits become unsustainable over the long run.
Says Mr Shreekanth PVS, FMCG analyst, Angel Broking, “Companies re-launch and re-brand every time a product does not work or market aspirations change. Lifebuoy's repositioning has, for instance, been a success. It was initially projected as a normal bathing soap and later repositioned in the health and wellness category.”
Which was the reasoning behind Wipro Consumer Care rebranding Sanjeevani honey as Glucovita Honey. Mr Anil Chugh, Senior Vice-President, Wipro Consumer Care, says, “Consumer research showed consumers perceive both honey and glucose drink categories deliver strongly on ‘health and energy' benefits. Since we have a strong brand in Glucovita, it makes perfect sense for us to re-launch the Honey range under the Glucovita umbrella.”
Competitive activity is another factor. Pushed by the growing activity of rivals in the milk and yoghurt segment, Nestle too unveiled it's ‘A+' brand in December.
“This is basically a rebranding exercise. We are going aggressive on communication. Otherwise, the milk quality and price remains the same,” said Mr Kumaran Nowuram, General Manager, Dairy Business, Nestle India Ltd.
The company refused to quantify the investments in the exercise, saying “it is a continuous improvement programme and investment spans years”.
Companies typically re-launch products every few years to add new features or reposition to keep the brands fresh and relevant.
“For example, last year our brands Chandrika ayurvedic soap, Glucovita glucose powder and Wipro Babysoft Diapers all underwent a re-launch on account of either a new positioning, new ingredient or new variant,” says Mr Chugh.
Emami too has come up with the a new communication campaign of adding ‘double kesar' to its Malai Kesar brand face cream claiming more fairness and winter protection.
“The new brand communication highlights the additional benefit of Kesar, given to the consumers at the same price. We have to keep introducing novelty. We have revamped the packaging of other brands as well, like Zandu Pancharishta and Zandu Nityam Churna,” says Mr Krishna Mohan, CEO, Emami Ltd.
(Source: Business Line)

Attrition goes down in IT's top 4

Fewer employees left the top four Indian software companies in the quarter ended December 31, 2011.
In other words the top four companies, including Tata Consultancy Services and Infosys, saw a drop in employee attrition during the quarter.
Attrition in the industry reduced after a spate of lateral hiring (those hired from other companies) in 2010. This has been contained in the last couple of quarters, said Mr Siddharth Pai, partner with Information Services Group.
Wipro witnessed a sharp decline in its employee attrition to 14.2 per cent – this means for every 100 people only 14.2 left the company. It was 21.7 per cent in same quarter a year ago.
“We have reduced attrition by about 9 per cent in the last two quarters to 14.2 per cent, which was the lowest in the last eight quarters. This is a reflection of the fact that employees have embraced a new direction, and our engaging measures are making a difference,” Mr T. K. Kurien, CEO of Wipro's IT business, in a conference call with analysts said.
According to Mr E. Balaji, CEO, Ma Foi Randstad, a recruitment company, two factors attributed to the decline in attrition. The first was the prevailing pessimistic macro-economic outlook, which makes people more risk averse. Employees would like to retain their existing jobs and big brands give them a safety feeling.
The second factor was that October-December is a festival and holiday season both in India and in the western world. For nearly two weeks in December offices are shut in most parts of the western markets. Hence, hiring takes a backseat.
“Our IT companies earn almost 90 per cent of revenues from the western world, so they go slow in hiring this quarter,” he said.
According to Mr Pai, the IT industry was expecting a significant return to growth and realised that they were lacking strength in the appropriate middle management cadres to manage the new (anticipated) growth.
They began to outdo each other in the salaries paid to new middle management hires in an attempt to fill up the ranks. This created a ‘revolving door' effect for a while, which slowed once the industry began to realise they were ‘poaching' from the same pool.
“At HCL, we believe our talent is our greatest asset and advantage irrespective of the business conditions,” Mr Ravi Shankar, Senior Vice-President, HR, HCL Technologies.
“We are always looking for ways and means to further enhance our value proposition to prospective and existing employees,” he said.
The focus on employees comes from the top and is found to percolate down to all levels of the organisation. ‘Employees First' – HCL's unique management philosophy – is the cornerstone for HR policies and activities.
The Employees First philosophy is not just stated, but is driven by the CEO and senior management, with various aspects featuring on their scorecards, he said.
(Source: Business Line)

Lessons for companies from Kodak's demise

I bet there is not a single reader of this column who did not feel stunned by the news of the demise of Eastman Kodak. Generations of camera buffs, tourists and members of ordinary households had known no other brand of camera and film. It is almost as if it had been an inseparable part of their lives.
In its heyday, Kodak had literally reached for the skies. A Kodak camera was used by the US astronauts on the Apollo 11 mission in 1969 to film the lunar soil from only inches away. Since its founding in 1880, Kodak film has been used on 80 movies that have won Best Picture Oscars.
At its zenith, it could claim nearly 90 per cent of the camera and film sales in the US and a 70 per cent margin on its products and processes. That it should be reduced to the pathetic plight of filing for loan and bankruptcy protection is probably the worst illustration of the fate that can overtake companies that do not keep abreast of advances in technologies and changes in customer-preferences.
For, Kodak is not the first to fade away. There have, for instance, been the EMI, Polaroid and Xerox, which had also gambled on their once great, but currently, irrelevant strengths, and “fumbled the future”. Nor will it be the last. Some technology and market watchers have begun to caution Hewlett-Packard, RIM and Nokia that they too may fold up if they do not catch up.

Airplane without wings

The Western media have gone to great lengths to distil the revealing lessons the Kodak debacle holds for other companies. I just give the gist without elaborating them, as the logic must be self-evident to the worldly-wise.
A company progressively, and unbeknownst to those running it, loses its élan vital by sticking too long with its core competence, without being proactive enough to explore ever newer avenues to make its impact. Invention alone, without the accompanying drive to market it, is like an airplane without wings. Kodak had the raw materials to become a player in the new digital world, but it was not serious about putting them to the best use.
It did make forays into “adjacent” businesses where it may have had some expertise, but soon got out of depth when it had to contend with different types of customers and products and different organisational cultures, business models and rules of the game. Diversifying into businesses away from what a company had been traditionally been focused on and it was most comfortable with has seldom worked.
Kodak expanded into chemicals, bathroom cleaners and medical-testing devices but this only led to an enormous drain on resources, aggravated further by mounting overheads on generous compensation packages and pension benefits. Timely selling of the company while it still had some value left might have saved it, but this is always a difficult proposition to implement and Kodak's decision-makers could not be blamed for dragging their feet until well past the eleventh hour. (It may be of interest here to recall that its own founder George Eastman committed suicide at age 77, leaving a note saying, “To my friends, my work is done. Why wait?”)

Need for upgradation

There is yet another factor that governs companies but this has not figured in the analysis widely made in the media. Organisations too, like those they employ, fall victims to the Peter Principle, rising to their level of incompetence. The implication of this for those in charge of companies is that they should be ruthless in getting rid of dead wood, and induct fresh blood laterally at various levels of policy making. The top echelons should not consider themselves to be an exception to this. In fact, the need for constant intellectual and technological upgradation is imperative in their case.
Nowhere does human obsolescence manifest itself so direly as when a company is undermined, by what has been called ‘disruptive innovations'. In the case of Kodak, complacency in the face of the multiplier effects of digital technology and smart phones acting as cameras, simply robbed it of its appeal and swept it off its feet when confronted with the tsunami of competition. RIP.

For India Inc, wage bill rises despite pressure on profits

India Inc may be going through tough times, but its wage bill seems to be increasing unchecked. For the third quarter running in December 2011, corporate India's employee expenses have jumped despite sluggish profits.
Results declared so far show that companies comprising the CNX 500 index spent 17.5 per cent more in employee expenses in the latest quarter, though profits barely changed. In the September quarter, employee expenses rose despite profits declining by 35 per cent.
A similar script of employee costs outpacing profit growth was seen in the preceding quarters too, when the economic slowdown was beginning to make a dent. The increase in employee costs could be a function of both pay increases and fresh hiring.

Widespread trend

The trend was widespread, with 60 of the 63 sectors comprising the CNX 500 showing a rise. The preceding three quarters too saw an overwhelming majority (between 89 and 97 per cent) of sectors pay a higher wage bill than a year-ago.
In fact, over the past 13 quarters ever since the global economic crisis began, employee costs as a ratio of sales have remained within a band of 6-7.5 per cent.

Leading the way

Among the sectors which were generous to their workforce in the September quarter include computer education, sanitaryware, alcoholic beverages and readymade garments where employee costs rose between 30 and 50 per cent over a year. Interestingly, the finance sector (comprising brokerages and NBFCs) from where much news about layoffs has been emanating recently, also figured among the top 10 sectors showing a rise in employee cost (around 24 per cent).
Not so surprisingly, the IT software sector has been in the forefront of this trend with employee costs rising by around 23-28 per cent over the past few quarters.
Initial results in the December quarter suggest a 30 per cent rise in the sector's wage bills.
In contrast, banks, metals and mining and tobacco were among the few sectors that saw wage bills grow at single digits, lagging their respective profit growth.


So, what could explain the dichotomy between all the news about cost cutting and layoffs and the rising employee bills of Indian companies? Raging inflation and the war for talent may have played a role.
Or it could be that companies which have resorted to layoffs have handsomely rewarded the remaining employees to ensure that the show goes on.

Bata: In step with the times

Customers of this shoe brand can now place their orders online and if the shoe of their choice is is not available at a particular store, the company will ensure home-delivery in two days. In an age when one can get everything from personal care products to sundry services home delivered, this is unremarkable. But consider that Bata comes with a baggage of being an old-school, no-frills footwear maker and retailer, and it is possible to understand the nature of change underway in what is, perhaps, the country’s best known footwear company.
Besides taking orders at the store, the company is also in the process of ramping up its sales from the online business. Currently, Bata sells about 2,500 pairs of shoes online monthly.
From being a player that dominated the no-frills section of the footwear wardrobe, the company is now looking to shed all its earlier image issues and is aiming to become a brand attractive to the youth and to the fashion conscious.
This, the company says, is the segment which will drive growth for the footwear market, currently pegged at Rs 25,000 crore in India. According to Arindam Saha, associate vice-president at retail consultancy, Technopak, the market is growing at a compounded annual growth rate of 10 per cent a year.
For Bata, the growth plan is clear. First, it is planning to change its store format and concentrate only on the ones that are more than 3,000 square feet. According to Rajeev Gopalakrishnan, managing director, Bata India, this will help achieve more than just a better look. “A larger store means better display possibilities for all our brands. Also this means that we can service consumers better, besides ensuring better returns,” he says.
This would also mean that the smaller stores would be slowly phased out and the existing ones would be moved into larger facilities within the same locality. Bata plans to add 100 stores to its current network of 1,250 stores in 2012 at an investment of Rs 100 crore.
Gopalakrishnan, who replaced the now legendary Marcelo Villagran at the company’s helm as recently as October last year, says that much of the strategy going forward is a continuation of the things that the company has been able to do well over the past couple of years.
First, the emphasis on a more youth- centric strategy means that the company is willing to work with designers. It has already engaged the services of Malini Ramani, ace designer, to come up with a range for Bata. Ramani will design three collections for the company over the next three years. Each collection will have 10-odd pairs. “Besides Malini, who is already designing for us, we plan on engaging the services of at least three to four designers per year, who will come up with exclusive lines for Bata,” Gopalakrishnan adds.
The emphasis on style is an important way of appealing to the youth — something even its competitors recognise. In an earlier conversation with The Strategist, Anupam Bansal, managing director, Liberty Retail Revolutions, the retail arm of Liberty Shoes, had said how the company was trying to up the style quotient with a renewed focus on footwear design and by roping in Hindi-movie star Hrithik Roshan as brand ambassador to drive home the message (The Strategist, page 3, issue dated September 12, 2011).
The designs will be showcased across the 30 top stores in the metro cities only, which is where the company thinks the audience for the merchandise is to be found. The hypothesis that the market will now be driven by the women’s and children’s segments is supported by a recent report by research consultancy Rncos, which specialises in BioPharma, IT & telecom, retail and services industries. The report, Indian footwear market forecast-2014, states that “the consumption trend is expected to shift more towards women’s and children’s footwear market.”
The reason, says the report, is that these segments, particularly the women’s segment (as the number of working women is increasing), offer vast growth opportunities to both new as well as existing players.
The company insists that while it might be getting designers on board to come up with the new-look footwear, the story is still about volumes and the mass market. The designer-led shoes are, therefore, still priced between Rs 1,200 and Rs 1,800. “Bata has always serviced the masses; this is what we do best,” Gopalakrishnan explains. “The plan now is to change with the changing taste of the masses, which has become more discerning and more style conscious. So while designers might be part of the plan, the bottom line is to get high fashion to them at affordable prices,” adds Gopalakrishnan.
Alongside, the look and feel of Bata retail outlets are also being spruced up. Even until a few years ago its huge stores resembled warehouses more than anything else, which did little to welcome foot traffic. Now there is a conscious effort to make the store ambience inviting and comfortable with neatly stacked racks, attractive decor, friendly yet unobtrusive sales people. A large section of these stores, laid out on the Bata international standards, is devoted to accessories.
The retailer’s message loud and clear: we are changing.
Gopalakrishnan is also correct when he says that the new strategy is an extension of the process which has been underway for the past six years. Consider the numbers: In 2004, the company’s net sales stood at Rs 694 crore, down 62 per cent from Rs 720 crore sales in 2001.
Historical change
Bata’s was a classic case of an old-world brand with little aspirational value and no direction after the market was flooded with options for the consumer post liberalisation. The company was on the brink of collapse, and talks of bankruptcy were rife. According to Krunal Mehta, vice-president, management & corporate communication, Angel Broking, problems arose from the fact that people wanted more than just value for money, which was all that Bata was offering. “Well designed Chinese shoes got the fancy of the lower middle class. That was when the real problems started for Bata which was unable to work on product development and cater to a broader category,” Mehta sums up the issue.
Others blame the fact that the company refused to budge from tried and tested designs. “The products became downright boring. There was nothing on offer for the brand conscious youth. Bata had become a brand for their grandfathers,” says a creative director with a Top 5 advertising agency who doesn’t want to be identified. In 2005, the management was changed. Chilean Marcelo Villagran took over. The task was cut out for him: streamline the production process, become relevant to the market, change retail strategy, and get a product mix in place, among other things.
Since then sales have ballooned from Rs 693 crore in 2004 to Rs 1,275 crore in 2010, a growth of 80 per cent. The company, which follows the calendar year for results, reported net sales of Rs 1,100 crore in the first three quarters of 2011. Also, from a net loss of Rs 62.7 crore in 2004, the company has moved on to making profits of Rs 47.44 crore in 2007 and Rs 95.35 crore in 2010. According to analysts tracking the company, the figures would have jumped to over Rs 140 crore by the end of 2011.
Besides this, Bata commands 30 per cent of the organised footwear market in India. Considering that 40 per cent of the Rs 25,000 crore footwear market is estimated to be organised, the 30 per cent share that Bata boasts of in this segment works out to be substantial.
Markets have registered this growth in balance sheet figures. The Bata scrip gained 40 per cent in 2011. This was among the highest gains for BS-200 companies. Ask company executives, and the explanation is that the stock bull run is rooted firmly in the company’s performance. “Look at what we have achieved in the past five years. Besides the past, my understanding is that the market is reacting to the good things we have planned for the company’s future,” says Kumar Sambhav, head, marketing and customer service.
Analysts say this growth can be explained by the fact that the company has been able to tap into the changing footwear preferences of the Indian buyer. “The reason Bata has been able to accomplish the turnaround is primarily due to the fact that the company has accepted that it needs to change with time,” says Shushmul Maheshwari, CEO, Rncos.
Advantage Bata
According to Maheshwari, another area where Bata has been able to derive an advantage over other homegrown brands like Kolkata-based Khadim’s and Haryana-based Liberty is the fact that the company has been able to change its business model from just a volume play to a mix between volume and margins. “While Khadim’s and Liberty are still perceived as purely Indian brands catering to the middle to lower income groups, Bata has been able to reposition itself as a brand that has a play in the premium segment as well,” Maheshwari elaborates.
Ask the competition, and they agree that Bata indeed has an advantage. “Bata has a scale, lineage and production team different from ours. They have the advantage of time, in as much as they have been around for 100 years. Also they have a network of 1,000 plus stores as opposed to us with 600-odd stores,” says Suman Barman Roy, CEO, Khadim’s.
This, analysts say, will be Bata’s biggest baggage going forward. Mehta of Angel Broking argues that shedding an old image is a tedious process, and the need for Bata is to change from being just a ‘value for money’ brand to ‘value for experience’ brand.
“Bata needs to move the brand from the lower middle class categorisation to an upper middle class one. Also the company would want to change the positioning of the brand from just being reliable to a brand which is both stylish and also reliable. Herein lies their biggest challenge,” Mehta explains.
It should therefore come as no surprise that the company now has 20 sub-brands including premium segment brands like Marie Claire and Hush Puppies. In fact, Bata plans to open 150 exclusive Hush Puppies stores by the end of 2012. Bata has also invested heavily in the technology that goes into manufacturing that perfect pair — the success of the therapeutic shoes for old people, the Dr Scholl’s line, is well documented.
Barman of Khadim’s points out one chink in Bata’s armour: the company is not strong enough in tier-2 and 3 cities, where companies like Khadim’s and Liberty are better placed to serve.
In all probability Bata is aware of this fact and is taking corrective steps. The company is looking to extend its reach into at least 40 smaller towns through a better organised wholesale distribution network. According to Gopalakrishnan, the company is looking to extend its network to towns with populations of 1 million through a web of priority dealer stores. “We are aiming to open 200 such stores in the next couple of years,” he says. Indeed, the company is trying to be in step with the times, with presence across social networking platforms including networking site Facebook.
Old might very well be gold, but for Bata, new is definitely the flavour of the season.

Analysts say L&T better placed than BHEL

The stock of Bharat Heavy Electricals (BHEL) is likely to come under pressure on Monday, since it has disappointed on order inflow. Although operational performance for the December quarter (announced on Friday evening) was largely in line with Street expectations, the disappointment was the negative order inflow of roughly Rs 1,800 crore, due to cancellations and changes in scope of some projects (worth Rs 5,847 crore). But, execution was robust and helped net revenue increase 19 per cent year on year to Rs 10,743 crore during the quarter.
The stock had risen 19 per cent in the past month and closed down by 2.8 per cent to Rs 274 on Friday, even as the Sensex ended up marginally (0.9 per cent) and the Bombay Stock Exchange’s capital goods index jumped 1.8 per cent, led by Larsen and Toubro.
Weak order inflows in the nine months (totalling Rs 15,273 crore) to December has led to its order book also declining 7.3 per cent year-on-year and nine per cent sequentially to Rs 1,46,500 crore. The weak inflow trend has put a question on the long-term outlook, which the market has been sensing—it is reflected in the stock’s historically low valuation of 9.8 times (sub-10 times) 2012-13 estimated earnings, after the correction of 39 per cent in the past one year.
Says Amit Mahawar, analyst, Edelweiss Securities, “We continue to remain concerned over BHEL’s overall business profitability in the long term, given the high base coupled with increasing domestic competition and pricing pressures in the power equipment space.” Additional pressure could come from the follow-on offer, expected before the end of 2011-12.
Q3: L&T better off
In Rs croreQtr ended Dec' 11
Net sales13,99910,743
% chg (y-o-y)23.019.0
Operating profit1,3442,080
% chg (y-o-y)9.50.4
Net profit9921,433
% chg (y-o-y)23.02.1
E: Estimates. Source: Company, Analysts estimates
Meanwhile, in the infrastructure sector, even as Larsen and Toubro (L&T) trades at a huge premium versus BHEL, analysts prefer L&T. It looks relatively better positioned on order inflows and the headwinds are not structural but led by the deteriorating macroeconomic environment, which appears temporary.
Q3: BHEL vs L&T
L&T has scored over BHEL on all the parameters, namely, growth in order book, order inflows, sales and both, operating as well as net profit margins. In contrast to expectations, BHEL’s overall revenue growth was driven by the power division, as revenues jumped 58 per cent to Rs 8,711 crore (79 per cent of sales). The sharp jump can also be attributed to the low base — the year-ago quarter had seen revenue decline by around four per cent compared to the December 2009 quarter. On the other hand, the industry division disappointed with a 37 per cent drop in revenue to Rs 2,367 crore. Though the macro environment has been weak, the decline is also due to the high base (revenues more than doubled in the corresponding period in the previous year).
Also, the company’s operating profit margin declined 360 basis points (bps), the biggest in the past 13 quarters, to 19.4 per cent due to high raw material and other expenditure.
In contrast, despite a high base, L&T’s sales growth of 23 per cent was not only better than expected, but the net profit margin was stable at around seven per cent, though the operating profit margin disappointed (down about 117 basis points year-on-year).
Going ahead, analysts suggest investors monitor performance of the industry division (railways, defence, transportation, telecommunications and renewable energy) in the coming quarters, as they are sceptical of BHEL’s new ventures and the power equipment industry’s profile has deteriorated in recent years, thanks to entry of private and foreign players. Says Mahawar of Edelweiss, “BHEL will find it difficult to build its non-BTG (boiler-turbine-generator) revenue base and, thus, will not be able to effectively utilise its unlevered balance sheet.”
Both the events—negative order inflow and decline in order book—has happened for the first time in BHEL’s history. The outlook continues to be bearish, as competitive intensity has heightened and order pipeline is limited.
Analysts, though, have turned positive about L&T since the interest rate cycle is expected to soon reverse and the company would be the biggest beneficiary. Accordingly the stock is up 34 per cent in a month and trades at 17 times 2012-13’s estimated earnings.
Says Shailesh Kanani, analyst, Angel Broking, “We maintain L&T as our top pick in the E&C (engineering and construction) space, due to comfortable leverage position, strong order book position (Rs 145,768 crore, up 27 per cent in Q3), superior return ratios and less dependence on capital markets for raising equity for funding projects. On the other hand, we continue to maintain our negative stance on BHEL, owing to structural issues like heightened competition, margin erosion and slowing of order inflows.”
Adds Venkatesh Balasu-bramaniam, analyst, Citigroup Global Markets, “L&T remains our top industrial pick. Its diversity/strong balance sheet allows it to withstand an extended slowdown and the shares should move up if the rate cut cycle starts.”
More so, as analysts expect BHEL’s sales, operating profit and net profit to grow at a compounded annual growth rate of 10, three and five per cent, respectively, between 2010-11 and 2012-13, while the same for L&T is estimated at 19 per cent, 12 per cent and 14 per cent, respectively. Thus, they expect the valuation gap between L&T and BHEL to stay, if not widen.
(Source : Business Standard)